U.S. Q4 Growth Revised Down to 6.9%, Slower Growth Ahead
The U.S. economy ended 2021 growing at a healthy 6.9% annual rate from October to December, the government said Wednesday, a slight downward revision from its previous estimates.
For the whole of 2021, the country’s gross domestic product – its total output of goods and services – jumped 5.7%, the fastest growth over a calendar year since a 7.2% increase in 1984. following a sharp recession.
Earlier, the government had estimated growth in the fourth quarter of last year at 7%. The slight downgrade reflects a weaker increase in consumer spending and fewer exports, the Commerce Department said.
Looking ahead, however, growth is expected to slow sharply this year, especially in the first three months of 2022. Rising inflation will likely weigh on consumer spending as Americans take a dimmer view of the economy. economy. Home sales fell as the Federal Reserve began to raise borrowing costs, leading to a sharp rise in mortgage rates. Exports could weaken as foreign economies are disrupted by Russia’s invasion of Ukraine.
For the January-March quarter of this year, the biggest drag will be a sharp reduction in the amount of merchandise companies are restocking on their shelves and warehouses. In the fourth quarter of last year, companies engaged in a huge inventory hoard, in a bid to get ahead of supply chain issues for the winter holidays.
That inventory replenishment added nearly six percentage points to fourth-quarter growth, a boost that hasn’t been repeated in the first three months of this year. And strong consumer spending likely attracted more imports in the first quarter, economists said, while a stronger dollar and slower growth overseas reduced U.S. exports. The combination is also expected to weaken the economy in the first quarter.
Economists predict that growth could fall to 0.5% in the first three months of the year and could even slip into negative territory.
Still, the first trimester will likely be a temporary hiccup. As the pandemic continues to wane, more Americans are traveling, eating out and flying. Companies are hiring at a healthy pace and increasing wages. Rising incomes are not enough to fully offset inflation, but should support continued consumer spending.
Wednesday’s figure represents the third and final estimate of fourth-quarter growth. The government releases three estimates of US GDP each quarter. Each report includes more complete source data.
Figures are adjusted for inflation, which has reached four-decade highs. Consumer spending rose 2.5% in the fourth quarter, down from the previous estimate of 3.1%. Economists expect spending to remain healthy in the first quarter, even as overall growth slows.
Corporate earnings growth, which has drawn political attention as a potential contributor to inflation, slowed in the fourth quarter. Profits rose $20 billion, or about 0.7%, in the October-December quarter from the previous one. That’s down from a huge jump of nearly $268 billion, or 10.5%, in the second quarter.
The Federal Reserve expects the US economy to grow 2.8% this year, much less than in 2021, but still at a healthy pace.
Accelerating inflation has prompted Fed Chairman Jerome Powell to signal several hikes in his benchmark short-term interest rate this year, with one or more of the hikes possibly being half a point, as opposed to the usual quarter-point increase. Such increases make mortgages or car loans more expensive and also increase credit card interest rates.
At a meeting earlier this month, Fed policymakers raised their benchmark rate to around 0.375% from near zero where it had remained since the pandemic hit two years ago. Officials predict they will raise the rate at least six more times this year to around 1.9%, although Powell’s comments suggest it could rise, particularly if inflation shows no signs of easing. In the coming months.
Rapidly rising interest rates could slow growth and dampen hiring. The Fed hopes to pull off a “soft landing” in which inflation drops back closer to the central bank’s 2% target, without the economy sliding into recession. But many economists worry that the higher rates could cause a slowdown.